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Vaccine success fuels record-breaking business confidence

Author: ICAEW Insights

Published: 19 May 2021

Business confidence hit its highest level since records began in 2004 according to ICAEW’s latest Business Confidence Monitor survey, with swift vaccine rollout and declining infection rate accounting for the positive reading.

The record result for Q2 2021 tracked by ICAEW’s BCM, found optimism at 38.5 on the quarterly index, its highest level since the survey was launched 17 years ago and second-highest since 2014. The result signals that a large majority of the chartered accountants surveyed expect economic conditions to improve over the next 12 months, with record domestic sales forecast.

The continued success of the UK’s vaccine rollout programme and a sharp decline in COVID infection rates is likely to explain why businesses are so confident for the year ahead. The lifting of COVID restrictions, together with accumulated household savings from a year of lockdowns, make a sharp rise in consumer spending likely for the rest of 2021.

“Companies now expect exceptional levels of domestic sales, as well as rising profits and increasing investment and employment”, commented ICAEW Chief Executive Michael Izza. “Much of this depends on consumer confidence also lifting and households being ready and willing to spend.”

Izza continued: “The past year has been a terrible struggle for businesses and confidence was at an all-time low in early 2020. We hope this strong bounce back in confidence will in turn deliver a year of strong growth, and the BCM is the clearest indicator yet that the rest of 2021 could see a historically strong economic rebound from the unprecedented lows of the past year.”

Record domestic sales growth expected, but uncertainty remains

While business confidence is high, it may yet prove to be fragile given both global economic and health risks, which the UK is not necessarily insulated from, and the possibility that the level of consumer recovery may disappoint. However, companies expected to see record (7%) growth in domestic sales over the next 12 months, and exports are also likely to increase (3.6%), after a decline of 0.7% over the past year.

Businesses also expected profits to increase in line with domestic sales and investment to rise (2.8%) over the coming year in line with profits and research and development spending (1.9%). Many companies predicted employment levels would rise (2.5%) at their fastest rate in six years, reversing a small fall (0.8%) over the past year. The government’s furlough scheme may have prevented greater job losses during this period, the report said.

Transport problems continue to grow for exporters

A lack of customer demand (41%) and regulatory requirements (38%) were some of the top rising challenges faced by businesses, with transport problems ranked third. Transport issues were a key area of concern for those companies that export. A shortage of road-freight and air-freight capacity, delays at ports because of Brexit disruptions and the recent temporary closure of the Suez Canal were the most likely reasons for this.

Against a backdrop of tough trading conditions, businesses in most sectors struggled with domestic sales over the past 12 months but all sectors expected strong growth in domestic sales over the next 12 months.

Widespread improvements across all regions

Confidence among businesses in all UK nations and regions improved in the second quarter of 2021, most markedly in the West Midlands as the release of pent-up demand is set to drive an expansion in the region’s manufacturing sector. Domestic sales (7.9%) and exports (4%) are set to outpace the national figure in the next 12 months.

Confidence was lowest in the North East, with businesses reporting the most subdued projections for domestic sales growth. Its predicted growth in exports also trailed the UK average. This is likely because sales were not expected to rebound as strongly, as they did not fall in the region as much as they did nationally over the past year.

Izza sends out a warning to UK businesses: “Even as commercial life in this country unlocks, companies will be mindful of wider health and economic problems around the world which could yet dampen or even threaten the recovery for UK businesses.”

“The UK economy is also closely intertwined with other parts of the world and slower vaccination rates elsewhere could affect our own economic recovery. For example, the shutting of production shifts in our automotive industry because of supply chain problems and subdued economic growth in the rest of the world show how much our economic recovery is reliant on the health of the rest of the world”, he added.

The results of this BCM were collected from one thousand Chartered Accountants based in the UK who responded to a telephone survey between 18 January 2021 and 12 April 2021.